ETF that doesn't remit its dividends

Hi Dan. My son who is 14 has been investing since 10 in his own trading account we set up. Since I pay taxes on his income from the account until he is 18, I limit him to mostly non-dividend or low dividend investments and he actually has never sold an investment. Only invests his earnings, some allowance, and what dividends there are. Could you recommend an ETF or fund emulating XUU.TO or XAW.TO that doesn’t remit its dividends but reinvests it for fund growth. He gets about $2000 / yr in dividends and has about $25,000 in cash in his stock account he wants to invest. It would be nice if he could spread out his portfolio a bit without actively selling.

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Asked on November 10, 2024 12:06 am

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Private answer

From what I am getting from you, you want to hold funds that don't pay distributions to minimize taxable income.

It is difficult to find something like XUU or XAW that has this type of structure. However, you could construct a reasonable US portfolio out of Global X's Corporate Class ETFs like HXS and HXQ.

What these funds aim to do is use total return swap contracts with institutions to avoid taxable dividends. In layperson's terms, Global X goes to a financial institution and says "Give me the total returns of the S&P 500 and in return (this is where the swap comes in) I'll give you a fee"

They're "swapping" the total returns of the S&P 500 for a fee.

So, if the S&P 500 returns 8% in appreciation and 2% in dividends, Global X would be paid 10%. This would be reflected in a growing Net Asset Value of the fund, and it would appreciate in price by 10% (minus the fees it has to pay). You have no taxable situations with these funds until you sell, and then they're treated like a capital gain/loss.

The only difficulty here is if you want small cap exposure like what is inside XUU (because this is a total US market ETF which contains small caps) you wouldn't get it, because Global X only has S&P 500 (HXS) and NASDAQ-100 (HXQ) ETFs that cover this for right now.

I know you mentioned you only allow him to invest in no-dividend or low dividend investments. I guess this all depends on your individual opinion, but I would certainly think that something like XAW at 1.5%~ fits that picture of low dividend.

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Posted by Dan Kent

Answered on November 10, 2024 1:58 pm

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This is a great answer. Tax reporting is the issue yes. Any reporting in the future may be a complicating factor for our situation. The account is not linked to my SSN in any way but I am liable for the taxes as he is my minor dependent. I will look into Global X's offerings and also see if there is a Canadian market equivalent. I don't have your knowledge level about such things, but I assume since there is a fee involved, and it is an ETF, that Global X holds the actual assets and isn't engaging in market derivatives trading and the like in order to generate income for themselves with the funds. Basically that it is a reasonably stable product, that will actually reflect the S&P 500. Thanks.

(don tatro at November 10, 2024 11:06 pm)

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Another solution: get your son a SIN, and teach him how to do his own taxes. Problem solved for both of you.

(Krispee at November 11, 2024 5:49 pm)

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He has a Canadian SIN. Had it from birth. The trading account is under his SIN; however in Canada no dependent minor may open a trading account without an adult registering as the "mentor" and being responsible for the taxes. The simple child trust structure was abolished as a stand alone option years ago because people were using it to generate family income without paying taxes. There are some "but what if" scenarios that most people don't qualify for and some extra measures that can be taken if the high value can justify the cost, but not for most of us. He is also involved in the discussion around taxes. I want my kids to have the sound financial education I did not when I was young. Now imagine the possibilities regarding custody, dependency or competing influences in today's family scene and you might be able to imagine why, although I advocate for income generating investments, it may be best to usually avoid generating taxable income in a minors investment account. This is also why if you ask almost all banks to open one they say it is impossible, they are mostly ignorant and the banks management won't support the service due too the potential extra load it puts on them figuring it out. It just doesn't fit the cookie cutter product offerings. National Bank is actually the only helpful bank in this regard any more. Quest trade was ok if you talk to the right people, but we went with NB.

(don tatro at November 12, 2024 5:49 pm)

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Hey there Don. There is really no "assets" to hold. Effectively the swap contract just allows Global X to receive the total returns of the underlying asset it wants to track and in exchange it pays the financial institution a fee. The main risk here that other ETFs do not have is counterparty risk. There is the VERY small risk that the financial institution couldn't make payments to Global X. But you're talking about some of the largest institutions in the world that it enters these agreements with.

(Dan Kent at November 12, 2024 6:42 pm)

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